The Treasury’s dynamic model of tax revenues still gets it wrong

The Chancellor believes in the Laffer curve. He accepts that when a tax gets to a certain level, if you raise the rate further you will suffer a loss of revenue, not a gain. He has been trying to get the Treasury to include this effect in their models, as they have now conceded that you can raise a tax too high to maximise revenues.

Labour still find this a difficult idea to grasp. When I last explained it again in the Commons recently a triumphant Labour MP asked me why as I wanted lower rates for CGT and top rate income tax, I did not ask for a lower rate for VAT as well. The answer is obvious. I want rates of Income Tax and CGT that maximise the revenues, not diminish them. At 17.5% or even at 20% if you raise the VAT rate higher you get more revenue. If you raise the Top rate of Income Tax above 45% you get less revenue, as the government has now proven in its latest figures. The easier it is for people to avoid a tax, the lower the rate has to be to maximise the revenue. The higher the rate of the tax, the more likely it is to be at or above its revenue maximising rate.

This week we are hearing reports in the news that the Treasury has admitted cutting Fuel Duty as this government has done has beneficial effects on output and incomes. Of course it does. Thank heavens the Treasury has tried to redo its sums whilst recognising this. They have come to conclusion that over the long run (20 years) the Fuel Duty tax cuts will only lose the Treasury 44%-63% of the alleged revenue lost in the first full year of the cuts.

This study comes up with a laboured and very long term answer to a different question to the Laffer question – what is the tax maximising rate? We can see the difference starkly if we look at a similar study of the effects of Corporation Tax cuts which the Treasury published with less media interest in December last year. That study, like the Fuel Duty one, concluded that over a 20 year period there would be a boost to GDP from the Corporation Tax cuts. This would recoup 45-60% of the revenue they say the Treasury loses in the first full year of the cumulative tax cuts. This again is a poor long term answer to a different question.

So what has happened with the progressive cut in Corporation Tax from 28% for larger companies and 21% for smaller companies to 20% by 2015-16? In Budget 2013 Onshore Corporation Tax was scheduled to fall from £35.5bn in 2012-13 to £33.5bn in 2015-16, a decline of 5.5%. (“Is it wise, Chancellor, to “give away” so much to big business when we have such a large deficit?” you could hear the mandarins ask).

In Budget 2014 the Treasury tells us Onshore Corporation Tax rose from the original £35.5bn in 2012-13 to £36.6bn in 2013-14, and is now forecast to rise to £42.3bn by 2015-16. Instead of a 5.5% fall there is now to be a 19% increase.

Of course these figures are sensitive to changes in growth forecasts for the economy, but the changes are so stark you have to conclude the Treasury model is still unable to handle the Laffer effect. Clearly the CT rate has fallen and is falling a long way – a fall of 28% in the rate for large companies over the full period, taking it down from 28% to 20%. Far from leading to a loss of revenue as the long term Treasury model now tells us , the actual Treasury forecast is for a gain of revenue over that time period. Why the difference?

I think the Treasury needs to do some more work on Laffer. I am sure from my own work that the current CGT rate is above the level to maximise revenue. That means if you cut the rate you will collect more money for the Treasury. I think we can all agree VAT is still below it, as probably is fuel duty. That does not mean I want to raise them.

Corporation Tax is more difficult to gauge. Given the huge swings in Treasury forecasts of Corporation Tax revenue in recent years, the Treasury clearly find it impossible to predict reliably. These latest studies are far from convincing, and laden with warnings that they are not predictions of revenue for the next few years, which is what we really need to know. I suspect the Treasury still does not want to admit that you can cut a tax rate and get more revenue in, though the evidence shows that is the case.

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82 Comments

In my experience, many well paid people are able to balance their income between capital gains and earnings. Increase the top rate of tax, and capital gains takings will increase, increase capital gains tax, and income related tax takings increase.

Increasing sales taxes during a recession is still a crazy idea, no matter how you try and sell it. And so is trying to make a point about tax changes and takings over a timeframe that includes an economic crash and (finally) recovery.

I try and get away, but you keep dragging me back. This is a re-run of Reagan and his budget director Stockman. The Laffer Curve is the bedrock of “supply side” economics. These two jokers added a third joker called Arthur Laffer.

When the UK got its own “supply-side” joker at the Treasury in 2010 we very soon got the Guardian one-liner you might remember. “Two comedians have been put in the spotlight in the current debate that has been opened up on tax in Britain. One is Jimmy Carr. The other is Arthur Laffer.

Reagan’s tax cutting Laffer curve (for the rich) with added “trickle-down” (for the poor) policy was a spectacular failure that has been well documented. The Laffer Curve not only did not work, it did not exist. Which is why the Treasury and the BoE staff discourage the use of it and the rest of supply-side theory.

You cite no evidence to support your denial of the Laffer curve phenomenon. In the UK, since the Thatcher Govt started cutting taxes over 30 years ago, every time taxes have been cut, receipts from the group experiencing the cut have risen, and every time rates have risen receipts have fallen. The example above is just the latest in a long line of evidence. The Reagan administration was profligate in many ways, but you are wrong to say tax cuts didn’t work, they did, as they did earlier under Kennedy.

The Laffer curve is a very difficult thing for the political Left – which is why a leftist paper like the Guardian finds a need to try to ridicule it – arguing with evidence is much more difficult.

Reagan was so successful that he managed to raise US debt from $930 billion to $2,700 billion in eight years. Tax take under Reagan was higher when he left office, just short of 20% , 1% higher than when he started. Fortunately, Thatcher was prevented from following the same path by wiser council.

Can I refer you to Mises Myth 9 http://mises.org/econsense/ch2.asp .
Nobody I know quotes Mises anymore, but I feel you are a Mises type. They don’t understand sovereign fiat currency economics either.

Your facts on Reagan are selective. He took over at the early stages of a deep recession caused by the statist, neo-Keynesian policies of Carter. Once the US economy recovered by 1982 it showed spectacular growth through the rest of Reagan’s presidency and beyond, driven in large part by tax cuts. Federal spending / GGP fell from 1982. And remember Reagan also had to engage in a huge rearmament programme due to the threat of Soviet communism. Even so he and Thatcher won the cold war without conflict.

“Reagan was so successful that he managed to raise US debt from $930 billion to $2,700 billion in eight years. ”

Is this meant to be a tongue-in-cheek remark?

My take on Reagan is that his policies were, in effect Keynesian. Reagan wouldn’t have seen it like that . He was about getting government off the taxpayers back by cutting taxes. According to Arthur Laffer tax cuts would generate more revenue, to make up for the cuts, for reasons outlined by Mr Redwood.

If they had, then Reagonomics may well have gone down in history as a failure! Instead they were credited for pulling the US out of recession. Ironically Reagan ended up getting it right because Laffer got it wrong!

I am sure you must be delighted that so many people are being taken out of tax by this reforming government. Counter intuitively, our expensive and under-productive state crushes the poor more than than the rich.

I am not surprised that the opposition is puzzled by Laffer. Their mismanagement of public finances, which luckily the public blames mainly on the banks, will reverberate for another five years if we are lucky enough to avoid them back in power. (I doubt we will be so lucky.)

Not of course that we should be looking for rates to raise maximum revenue anyway (perhaps around 40% of GDP) that is far to high. We should be seeking the rates that produce maximum benefits for the voters perhaps just 20% but of a much higher total GDP due to more money being left with the wealth creators and workers.

Also remember that cutting say income tax may produce not only more income tax but also more VAT, more stamp duty, more fuel duty etc as the money will be used in some other way by the recipient.

CGT should be no higher than 20% and that only after indexation. Osborne promised but then ratted on £1M threshold and even after the next election. Inheritance tax at 40% is absurdly high and drives many of the wealthy out of the country or from returning. Either that or it distorts their financial planning and investment decisions in unhelpful ways. Would you stay in the UK if you had to pay say £2M PA for the privilege? This when so many countries sensibly have no IHT at all.

If you were say 65 with assets of say £20M why would you go and live (or stay) in the UK and give perhaps 75% of it to Osborne to waste on green crap, hs2 and the likes. This from IHT, income tax and all the other taxes you will pay?

There is also of course the hidden taxes of devaluation of the currency and the deficit, government borrowing to finance their waste which will also have to be paid.

I would go for something like 30% flat rate income tax and get rid of NI (only a second income tax), 20% CGT after indexation for inflation, 1% SDLT max, 20% sales tax (VAT is an absurd EU tax) and abolish IHT. We still have huge fuel duties, the deficit tax and endless other taxes and fines.

Above all we need to cut out the endless waste – otherwise the hidden deficit tax still mugs people just the same. Start with all the green crap subsidies, the EU fees, HS2, the hopeless NHS, the inefficient education systems, the endless layers of government, the the hugely inefficient legal system …….

The other way to raise revenues is to get rid of all the daft regulations and employment laws that endlessly deter businesses form expanding and distract or deter people from making money.

Fewer bureaucrats, fewer lawyers, fewer tax experts and fewer tax collectors, fewer bonkers subsidies, lower tax and more engineers, scientists, builders, business people …. that is the way forwards. We will not get rich all suing and taxing each other.

The problem was Cameron threw the election away and anyway is a quack green, pro EU socialist at heart. We will shortly see what Miliband does.

So this is how our “representatives” spend their time. Not attempting to improve the quality of their lives. Not reducing the financial burden of taxation. Not removing barriers to earning a living. Instead they just concern themselves with working out how to extract the most money from the tax cattle.
Well here it is in black and white. We are farmed for money that is used to fund state interference and incompetence topped off by corruption and scandal.

I think you misunderstand JR’s purpose. In a government debt crisis it is responsible to seek to maximise revenue while minimising damage to growth.
The lower headline rate of corporation tax appears to have done that (and we can see confirmatory evidence from Ireland). JR seeks to argue that the same logic may apply to CGT and IT. Makes sense to me.

That is about it then they throw a few tiny bones back to the public perhaps some 50p value of antibiotics from the NHS or something (for the prescription charge of £7.85 of course). Or (often) a second rate education for your child.

I see that radio 4 just now was on (yet again) about woman earning less due to their “lack of confidence”.

Well firstly woman without children already earn more than men.

It seem very clear to me that they earn less because (particularly woman with children) very sensibly make other life choices. Money is less important to them than their children/work life balance. Also many have husband earning that can enable them not to have to work too hard.

If woman were cheaper than men (like for like) then any business only employing them would be at a huge advantage. This is clearly not the case as the market would then correct the pay differential.

The BBC spend half the time telling us men and woman are just the same and lower pay is thus “discrimination”. Then the other half telling they are different have less confidence, but are better at multitasking, communicating, empathy ……

Could they make their minds up perhaps? Let just employ the best for the job. Equal pay laws are often in effect often a discrimination against the often more money motivated men.

I often wonder Lifelogic, if the statistics used to tell us females are paid less than males are accurate.
Do they allow for those females who make a decision to stop working for many years to raise children or those who elect to go part time for many years?
Or do they just compare male and female salaries in full time permanent careers, because my experience of this situation over decades as an employer is that females earn the same rates of pay.
However for obvious reasons, if you look at average lifetime earnings females will appear to earn less.

Indeed woman who have no children already earn more than men this largely destroys the silly “BBC think” argument. The ones earning less are generally the ones who select work that fits in with their work life (and child care) balance.

You can thus only get to equal pay between the genders by rather large active discrimination against the (generally more money motivated) men.

What a state to be in to have burdened ourselves with a ruling class that sees it’s job as being to extract the most it can from us so that it can grow ever larger and spy on and interfere in our lives to an ever greater degree.

But as things are the government has run up an enormous deficit that needs to be tackled with greater urgency, so for the medium term at least we are left with either maximising tax returns and/or handing the deficit on to our children and grand-children to deal with.

Tax regimes have to be efficient at any time and not founded upon some misguided principle for ideological reasons, but especially when we have such a massive debt that simply MUST be paid off. Slogans like, ‘We’ll tax the rich until the pips squeak.’ did us no favours and showed a complete misunderstanding of how it works. There is a point when it becomes prudent for an individual or a company to take their money elsewhere (if they’re lucky enough to be in that position), and that can bring about a downward spiral as the need for expenditure is still there, with fewer people to fund it. I’m sure we all remember the Labour government of the 1970s and the mess that one left us too!

Yet when people from whatever level of the financial strata see their hard-earned cash going to people such as those depicted in last Friday evening’s Channel Five programme (available until Dec 2015 so I urge everyone to see it), they are bound to resent it. Simply put, there wouldn’t be the need to tax so much, if we didn’t waste so much, and that forms at least a part of the equation.

Happily, and without publicly mentioning any names, I can report that by drawing the above matter to their attention, some influential people are now looking at the problem. But I don’t hold out much hope that it will be solved in either the short or medium term. First, we need to plug the many holes in the massive great big colander that is our membership of the EU. Then, we might just have a chance to reduce taxation!

“That means if you cut the rate you will collect more money for the Treasury.”

At the moment it must be surprisingly easy to avoid paying tax because the tax system is so incredibly complicated and getting more and more lengthy and involved owing to the seemingly uncontrollable desire of arrogant politicians of all parties to try to improve the plebs like me.

I go on Labour Party websites and all I see is promises to “give away” more and more money to “the vulnerable”. It really is getting ridiculous.

So rather than fiddling around with the very complicated system, mightn’t it be a lot better to simplify it? I hear that the tax instructions are well over 1000 pages – an accountant’s delight!

I like the laffer curve idea very much though. Did you know that when first presented it was done sideways so it looked very much like a breast? To avoid offending the feminists, it was turned sideways! It is true: at the end of the day paying tax is voluntary for many people, especially those who have imaginative and skilled accountants.

Too high-for-Laffer CGT rates doubtless cause those with taxable assets to delay realizing their gains but typically they cannot avoid them (unless Budget Day Value is changed once more) and ultimately their estates will pay inheritance tax at 40 per cent.. So if HM Treasury is patient, perhaps its rewards will be all the higher in due course?

You ask: “So if HM Treasury is patient, perhaps its rewards will be all the higher in due course?”

The answer is No! If they survive for more than five years the Treasury will be worse off. The net present value of future cash flows beyond five years is next to zilch – even at todays unusually low interest rates. The Treasury needs cash now first to reduce the deficit and then to reduce the national debt. It is pursuing a foolish, counter productive tax policy as JR constantly points out.

It is interesting to hear that Jeremy Browne, the most sensible sounding LibDem politician, appears to accept the Laffer principle and other tenets of liberal economics. No wonder he got the sack. The Laffer curve is one of the most difficult oberserved phenomena of economics for leftists, as we often see from posts on this site. It is clear that the rates of income tax, CGT and now corporation tax are set above their revenue maximising levels. We should remember also that maximizing revenue from a particular tax is not the only benefit of cuts in rates. There is additional growth which comes from the added incentive to work and invest from lower taxes – which in turn leads to higher tax revenues in other areas,including of course VAT receipts as people spend more. That’s why those economies such as Switzerland Singapore and Hong Kong have performed so much better over the long term than high tax economies. Its why formerly super high tax countries such as Sweden, which saw their relative performance plummet, put tax cuts at the front and centre of their economic reforms in the 90s and 2000s.

Leftists will carry on with shrill denials of the Laffer curve, but they cannot suppress the truth – so the more publicity that can be given to facts such as those above the better.

Leftist spend most of their time suppressing the truth and selling the magic government money tree, all shall have prizes & politics of envy agenda to the dimmer, chip on the shoulder, save the world from AGW religion and BBC types of voters.

The Laffer curve seems to be nothing new, but an extreme example of Le Chatelier’s Principle, which states that if a system in equilibrium is disturbed, the system reacts in such a way as to reduce the effect of the disturbance. Originally formulated in chemistry, the principle has universal application. In tax terms, it simply means that if you increase tax rates by x%, the increase in the return produced is less than x%. With VAT that can be seen to be due to customers buying less at the higher price. Taken to extremes, too large a tax increase will reduce revenue.

Too large a tax rate will indeed produce less revenue and not only in that particular tax but also in revenue from the other taxes. Also by deterring growth in the economy too, new jobs and the like. The UK have rarely managed to raise much more that 40% of GDP even with Healey’s idiotic 98% income tax rates.

About 20% of GDP is quite enough first get spending down to that. It is spending, waste and corruption that are the main problems.

David–In Chemistry, it’s the old P1V1 over T1 = P2V2 over T2. My memory is that it has to be a constraint (not just any disturbance, which might be favourable) on the system, with the system moving as you say to minimise the effect of the constraint. The system here is the economy and increased tax is the constraint. The way Le Chatelier works here is to reduce the size of the system, that is the economy, with the result that the tax take goes down, reducing the constraint. If a tax reduction were considered a constraint then lowering tax would mean increasing the size of the economy which would raise the tax take; but not necessarily back up to where it was.

Not much here about increasing revenue through enforcement . Little George Osborne seems to be obsessed with chasing individuals who may have some money stuffed away in Switzerland. However he seems to do little about companies who do lots of business here but pay little or no corporation tax. It would be interesting to see how many of them also pay the minimum or low wages so their staff then have to supplement their wages with benefits and the employer then picks up an indirect subsidy from the tax payer on top. I bet baristas make top dollar earnings. They are going to need to repay their student loans. Charles Moore had a very interesting column in the Telegraph over the weekend, using the fate of the COOP for the nihilism that seems to spreading amongst the British. Its interesting also to see that even the Royal Household is now using zero hours contracts. Anybody who thinks the current political settlement is here to stay is off their rocker.

Little George Osborne” as you call him, can do very little about multi national companies who arrange their affairs to pay minimal tax.
It is their legal right to do this as it allowed by the EU.
They are allowed by the EU to define what nation their HQ is and all revenues to the business from trade within the EU come into that HQ where taxes are paid.
This is why many nominate Luxembourg or Litchenstein or other lower tax countries.
You may dislike it but the UK government has little power to do anything about it.
I cannot imagine you would arrange your business affairs so you paid much more tax than your competitors if there was a simple legal method of not doing so.

You may dislike it but the UK government has little power to do anything about it

The UK government could lower the corporation tax rate to make it more appealing than Luxemburg. Should they not want to, they’ll lose all the tax take. However, if the EU says that we are not permitted to do that, then there’s still a simple solution….

Unfortunately, the greedy articles in SW1 will prefer to spend their energies trying to make an even more complicated tax system in order to try and stop the money escaping. They should learn to apply Occams Razor instead.

Its not just a problem for the UK or other EU members. The US Treasury has a similar problem at the moment in getting its hands on a share of the profits of US corporations who deliberately hold their cash offshore. So we cannot just blame the EU as usual. It may have something to do with pliant politicians who let them get away with it because it does not fit with the neo-lib mindset.

Incidentally I call him “little” as I cannot see how him and his band of metrosexuals, gay marriage enthusiasts and trust fund kids match up to the Conservative party of old. You know the type of MP, distinguished war record, built up their own businesses, had actually done something with their lives etc

I understand AL, but it may well be a deliberate attempt by the current leaders of the Conservatives to shake off the “nasty party” image which the left has continued to peddle endlessly in order to appeal to more of the voters, rather than a just the traditional declining aging membership.
Would Sir Alex Douglas-Hume or Ted Heath ever get elected today with the modern demographic in the UK?

The USA Government can change the law if it wishes AL, we do not have such simple sovereign powers.

We have signed various treaties with our partners in the EU which have had the effect (accidentally or intended) of allowing multi nationals to arrange their affairs as they wish so as to avoid paying corporation taxes in the UK.
Altering these treaty tax laws would be unlikely as the right to work and do business throughout any EU nation and elect to pay taxes wherever you want to is an important central objective of the move to a United States of Europe.

So blaming the EU as usual, as you put it, is very much the correct thing to do.

“Little George Osborne” as you call him, can do very little about multi national companies who arrange their affairs to pay minimal tax.”

Of course he can he could tax say coffee shops on turnover instead of profits, so small individual ones are not at a competitive advantage to ones who shift their profits abroad. Or he could look at the tax legitimacy of these transfers.

I’m no tax lawyer LL, but I think you could well see them appealing successfully to the EU which as Uni5 often says, “we must obey”
I agree with you that it very unfair that UK based businesses pay their taxes in the UK whereas some multinational corporations, who roam the world, often manage to legally avoid paying in the UK.
Perhaps that is why big business supports the EU so enthusiastically.

Trouble with Dave is he is a sort mutation of Sir Alec and Ted and that is why he will soon end up on any top ten list of crap primeminsters. He has Al’s out of touch patrician mindset and Ted’s liberalism. Remember as Lord Norm always likes to point out, it was the “nasty party” that kept winning large majorities and did not need the help of the Libs.

Indeed AL
I find Lord Tebbitt has often been proved right, on this subject and many others.
It is a shame the current leaders of the party listen to other senior voices who have been proved wrong more often than not.

It is a concern that George Osborne has allowed bureaucrats to persuade him to put through some disgraceful measures such as seizing money from peoples’ bank accounts if HMRC thinks they are owed, but have not yet established that in the eyes of the law. Even more egregious is a proposal that someone who fails to declare foreign income, even if they no intention to evade tax – ie through error – is now to be charged with a criminal offense. Conservative MPs need to strike these measures down. They should also remember when the time comes for a change of Conservative leader, that Mr Osborne was prepared to put his name to some profoundly unfair and un-Conservative measures.

All of the Treasury and BoE models seem to treat the UK economy as a closed black box and have fallen ever further behind reality as we have an open economy.
How could the Bank target a particular UK unemployment rate when all of Europe can move here, or we can move there?

I expect it’s impossible to model Corporation Tax accurately as the take depends on decisions about tax domicile where other countries like Switzerland and Ireland are competing to offer lower rates, and knowing what they will offer and how corporations will respond is bound to involve guesswork.

In order to tackle the Apples and Starbucks gaming the system I suggest a turnover tax be introduced where the amount collected is credited in that tax year against UK corporation tax liabilities but not allowed to be carried over.

I agree with Colin who supports the view that we should revisit all aspects of spending and decide just what comprises essential spending for the UK today. I can see considerable difficulty in reaching agreement let alone implementing potentially radical changes to our budgets. But perhaps someone – maybe a new leader from a new generation- out there will be able to push this kind of thing through.
What however puzzles me is the following: Does not the Treasury employ professional economists? If this is so then I would have thought they had been taught about Laffer and his curve. Why do they ignore basic principles that underpin their training?

I would prefer the treasury to look at how to reduce Government’s influence in our lives to the bare minimum thus reducing government expenditure

Then they would not need to figure out how to extract the maximum yield from those who can afford to arrange their tax affairs and could reduce the burden on those in PAYE servitude who also pay disproportionate levels of their earnings to facilitate government’s largesse.

I received my P60 yesterday which confirmed that my Tax and NI contribution had increased by 57% since 2008/9. My salary has increased but not even half that percentage. This results from the raids made on higher rate earners by this and previous governments to pay for tax breaks for the less well off and inflation proof rises for benefit recipients.

Why is there no full transferable tax allowance between two adults living in the same house bringing up children? Mothers going to work for close to minimum wage cannot possibly earn sufficient to pay for the subsidised childcare that is being offered it would be better to encourage families to have one earner staying at home.

My Polish neighbours have a similar house to me (better furnished) to house the single mother, three children (one grown up) and one newly arrived grandchild. all on a cleaner’s salary.

When it comes to trying to modify our behaviour through taxation (eg smoking, drinking, gambling, driving. flying) the Treasury deliberately increases rates of tax to discourage our use, so its a puzzle why they feel increased rates in areas of general taxation will always bring about increased revenues.

It is of course very short sighted to regard a tax solely as a means of raising revenue and also the sole reasons for changing a tax to increase that revenue.

Thus for example we must revue the effects of reducing fuel tax on both pollution and business costs. These seem to show that it would have been better not to reduce fuel tax but to improve business costs by reducing employers’ NICs which would have a more direct effect on improving employment.

Similarly one must seriously question the wisdom of reducing beer tax when the publicans could have been equally helped by the above NICs reduction. The pressure put on A&E and the police by cheaper alcohol clearly shows the need for minmum alcohol pricing, coupled with other measures like restrictions on off licence opening and tightening the sales in bars to already inebriated customers.

I must thus question strongly this blog which concentrates solely on maximising revenue.

I have just heard that Inflation, or rather the Consumer Prices Index (not quite the same thing), is down to 1.6 % pa. Are we to take it that we shall soon start to hear cries (to my mind wrongheaded) to take steps to drive it back up to the (totally arbitrary) “target” of 2%?

Here we are, at the mercy of a bunch of competing statists, each one trying to convince us that their particular model is best. When in truth they are attempting to model the unmodelable. Neither the Fed, nor the BoE, nor any treasury saw the last train smash coming in 2008. Their fancy models were useless. So why should we trust any of them now? The arrogance is palpable.

Just leave the market alone, it will correct as needed, and it will react far quicker than the bureaucrats can. The free market wont prevent failure, failure is part of capitalism. The free marker will wipe out failing enterprises when the money and risk appetite runs out, and that is long before the govt wakes up. The govt can throw unlimited printed money and hand the risk to taxpayers to keep any zombie alive forever. The bureaucrats realise so late that they are wrong, that failure becomes too big to fail, but through their arrogance and ignorance they plough on.

Either they are incompetent or they are malicious, and either warrants a sacking.

A lot of really good points Gary. I watched a video from YouTube a few days ago by Max Keiser called ‘Watch and Learn’ in which he gave a good analysis of why in your words, ‘The free marker will wipe out failing enterprises when the money and risk appetite runs out.’ I urge people to have a listen, but it is over an hour long.

And I have a lot of sympathy for ‘Neither the Fed, nor the BoE, nor any treasury saw the last train smash coming in 2008. Their fancy models were useless.’ I would add, so were those in charge! I wouldn’t regard myself as anything other than a private individual who takes an interest in these things, but even a novice like me knew well in advance of the crash, that institutions all over the place were lending money on some very shaky ground, incentivised recklessness by the massive bonuses on offer, and that it was all going to go wrong sooner or later with global contagion.

And if we need another example of the incompetence of those in charge, listen to what Max Keiser says about Gordon Brown selling our gold reserves and what lay behind it. I stop short of the use of the word ‘corrupt’ in respect for JR, but ‘inept’ doesn’t even come close!

Then we need to think about QE by the B of E and the US Fed, and that some actually gained massively from being bailed out – something the hapless tax-payer could be on the hook for. So if these travesties never happened in the first place, as a consequence of absolutely pathetic mismanagement, it could only be to everyone’s benefit. It’s scary to think we have such people who could once again get their hands on the reins of power.

Why should your theories on tax maximising revenue not apply to VAT? The higher the rate of VAT the more likely that tax evasion will occur, particularly, for example, in the construction industry at the domestic level. It seems as if you are trying to make your theories fit in with current government policy by making the exception for VAT.

Reply They do apply, but at higher levels than the current rate! At this rate if you raise the rate you still collect more revenue.

Comment on Reply–It is enough for me to know that it is a EU (and predecessors) invention to clinch it: I for one think that the whole idea of VAT is misconceived and a fortiori that its current level is howling mad. We should get out of the EU and go back to a simple Sales Tax and at a much more modest rate. I suggest 3% max.

JR says, ‘At 17.5% or even at 20% if you raise the VAT rate higher you get more revenue.’

Wrong, you get a barter economy. VAT is about the worst tax possible for any business outside financial services, where the trading stock is quarantined. Everyone making widgets out of real raw materials and producing tangible stock is taxed on turnover, irrespective of whether or not their business is profitable. If you sit in front of a screen trading financial securities, turning over your trading stock is tax free. Indeed any suggestion that trading financial securities should be subjected to a fractional Tobin tax calls forth visions of the end of civilisation as we know it. Wasn’t it Ted Heath who spoke of an ‘idle and luxurious life’ before joining the board of Brown Shipley?

Next time the august members of the Government are wringing theirs hands about the UK’s over-sized banking system and service economy, remind them it’s the VAT wot done it.

During 13 years of power, Labour filled all senior roles with sympathetic ‘moles’ SPADs, etc. So when the Conservatives try to achieve anything, in transport, environment, treasury, defence etc, (especially in education and health!) they are working against the whole upper level of the civil service, who are programmed to throw a spanner in the works until Labour comes to power again and the ‘cutz’ are cut.

Reduce the civil service to 10% of it’s size, and see how much more gets done!

BTW, I bet that a maths graduate could give you a pretty good idea of how a reduction in tax rate would play out in about a day, certainly closer than the “40-60%” answers given above!

From this account, it seems you agreed with the Labour MP that taxes should be levied at such a rate that the government annexes the largest possible part of the nation’s resources. The two of you were then disagreeing about the best rate for this.

I hope I am missing the wider context? Even though you were right to point out potential efficiency gains, it is rhetorically necessary to always assert the moral case for lower TOTAL tax revenues at the same time, whether in conversation or in print. We must not cede this ground unfought.

Reply Nor do I, but at the moment with a large deficit I am just trying to win the argument that lower is better all round sometimes.

“At 17.5% or even at 20% if you raise the VAT rate higher you get more revenue. ”

But how much more revenue? Unless it is 2.5%, the increase must be having a deflationary effect on the economy, and is therefore reducing the revenue from other sources of taxation too.

The Bank of England has finally come clean and admitted that the £ is just an IOU like all other currencies. So why does the government need to get back more of its own IOUs?

The only logical reason would be to cool down an economy which is running too fast. In other words to head off inflationary pressures.

That’s not a problem in the UK at the moment! There was no need for the government to remove more of its IOUs from the economy by raising VAT. The sensible policy is reduce it to 15% at the earliest possible opportunity.

John, as the topic is about maximising revenues could you please tell me , after watching the ch5 documentary on (People ed) coming here for benefits, how do you maximise the income from them. Foreigners just turning up, entitled to everything, for doing nothing, except getting here. One woman had turned up with 11 children and 11 grandchildren. All needing housing, and straight on benefits, then down to the doctors to register for all their “free” treatment, courtesy of us of course. If I understood it right she was entitled to £24k a year. Not much to some people, but this is net, for doing absolutely zilch. There was a disabled lad who came here 3 year ago – now getting £750 a month. That’s more than I get from my works pension, which I had to work 40+ yr for. (words left out as generalising about people ed)
Where is the sense in importing people who are purely a financial burden to the rest of us. People who openly say they will have more kids, just to claim more money. People who say -“we will never go back”. (etc ed).
I really don’t see why the govt is bothered about trying to settle the country’s financial books. We will be totally overrun by (too many people who want to live off free services and benefits ed)

Income tax raises a trivial amount of money money – less than is paid out in benefits .

Private bank lending at a margin of 4%+ on the current reserve ratio is a very expensive (ruinously expensive?) way of injecting money into the system .

Why not scrap income tax for everyone earning (total package inclusive of pension) less than £100,000 a year , move towards financing banks with depositors money and just print and spend the money into existence ?

““At 17.5% or even at 20% if you raise the VAT rate higher you get more revenue. ”

I’m just wondering to what extent the word “revenue” applies. My IOUs are worth something to everyone else who might hold them. They are worth nothing to me in my own possession. They are a security risk, if anything, so I’d just tear them up. I couldn’t consider a pile of them to be ‘revenue’.

If done as part of a package, a modest rise in the standard rate of income tax would be helpful:

– Raise the income tax threshold from £10,000 to £13,000
– Raise the 40% threshold from £42,000 to £50,000
– Get rid of the 45% rate
– Pay child benefit to everybody but make it taxable at the marginal income tax rate of the couple’s combined income

How much could you raise the standard rate of income tax to without anybody being worse off? Solve for x the equation, which relates to the income tax on an income of £42,000:
£10,000 x 0% + £32,000 x 20% = £13,000 x 0% + £29,000 x x%

The solution is that if the Chancellor were to increase the two thresholds as suggested, he could raise the standard rate of income tax to 22% without anybody being worse off.

If the Chancellor wanted the changes to be revenue neutral, it might have to be more than that.

Cc George Osborne? Or would he shoot the messenger bearing good news?

About John Redwood

John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.